Canadian Pacific: Norfolk Southern wrong about merger risks

OMAHA, Neb. (AP) — Canadian Pacific said Tuesday that getting regulatory approval for its proposed multi-billion-dollar purchase of Norfolk Southern shouldn't be a problem.

Norfolk Southern has rejected two cash-and-stock offers from the Canadian railroad, saying regulators wouldn't approve the deal and investors would be better off if the Norfolk, Virginia, railroad remained independent.

The deal's value is also contested. Norfolk Southern estimates the latest offer from Canadian Pacific at roughly $27 billion, and says it's inadequate; Canadian Pacific says it's between $37 billion and $42 billion based on the projected value of stock in a new company that would own both railroads.

The role federal regulators might play in a railroad merger like this is the subject of much speculation because no major railroad deals have been approved since the rules were toughened in 2001.

In a report issued last week, Norfolk Southern had consulted two former STB commissioners who predicted that concerns about competition and the structure of the proposal would doom this deal.

Norfolk Southern has said it believes the way Canadian Pacific proposed structuring the combination would violate a prohibition against an acquiring railroad taking control of its target before a deal is approved.

It's set up as a voting trust, with Canadian Pacific CEO Hunter Harrison taking over Norfolk Southern while the deal is being reviewed by regulators.

In a Tuesday report, Canadian Pacific said that Norfolk Southern is wrong to think the Surface Transportation Board wouldn't approve such a structure. It said that tactic is common in railroad mergers because of the prolonged review needed.

Canadian Pacific also said it doesn't believe its proposed merger with Norfolk Southern would necessarily trigger additional deals among the other major railroads, as some analysts predict, and would actually increase competition.

Norfolk Southern issued a statement Tuesday afternoon challenging Canadian Pacific to back up its opinion by asking regulators to rule on the proposed deal's structure.

Stifel analyst John Larkin said he thinks it's unlikely regulators would approve the deal. And even if it goes through, he said a difficult proxy fight would make it difficult to successful integrate the railroads.

Canadian Pacific executives plan to hold a second conference call with investors Wednesday about the deal.

Norfolk Southern Corp. shares rose $1.67, or 1.9 percent, to close at $91.02 Tuesday. U.S. shares of Canadian Pacific Railway Ltd. rose $1.97, or 1.6 percent, to $125.